The Closing Bell
Statistical Summary
Current Economic Forecast
2013
Real
Growth in Gross Domestic Product:
+1.0-+2.0
Inflation
(revised): 1.5-2.5
Growth
in Corporate Profits: 0-7%
2014
estimates
Real
Growth in Gross Domestic Product +1.5-+2.5
Inflation
(revised) 1.5-2.5
Corporate
Profits 5-10%
Current Market Forecast
Dow
Jones Industrial Average
Current Trend (revised):
Short
Term Uptrend 15227-20227
Intermediate Uptrend 15227-20226
Long Term Trading Range 5015-17000
2013 Year End Fair Value
11590-11610
2014 Year End Fair Value
11800-12000
Standard
& Poor’s 500
Current
Trend (revised):
Short
Term Uptrend 1708-1862
Intermediate
Term Uptrend 1622-2204
Long
Term Trading Range 728-1850
2013 Year End Fair Value 1430-1450
2014 Year End Fair Value
1470-1490
Percentage Cash in Our Portfolios
Dividend Growth
Portfolio 43%
High
Yield Portfolio 46%
Aggressive
Growth Portfolio 43%
Economics/Politics
The
economy is a modest positive for Your Money. Not
much data this week. What there was, was
mixed though we did get some very upbeat stats: positives---weekly jobless claims;
October nonfarm payrolls; September personal income; the ISM nonmanufacturing
index and third quarter GDP ;
negatives---mortgage and purchase applications, October factory orders, third
quarter price deflator, November consumer sentiment; neutral---weekly retail
sales and September personal spending.
The big numbers,
of course, were
(1)
third quarter GDP
and October nonfarm payrolls---both of which were very positive and clearly
support the notion that the economy continues to improve. The big questions
are, [a] are these signs that the economic growth rate is accelerating, [b] did
the Fed have an inkling of these results when it made its last more hawkish
FOMC statement? and [c] if not, will they alter the trajectory of the Fed’s
transition from easy to tight money?
Of course, as
I often note, one or two stats don’t make a trend. So we need more data before concluding that
the growth rate of the economy is picking up and/or that the Fed will have to
move up the start date of any transition.
Especially since both measures had some questionable internal
components. At this point in time, my
best guess is that these are not signaling an improving economic growth rate;
but we shall see.
(2) the weak November consumer sentiment report which keeps alive my
worry that the DC fiscal fiasco is negatively impacting business and consumer
sentiment---and subsequently spending and investing. Importantly, the latter has yet to be
established. Indeed, it is possible that
the GDP and payroll numbers are indications
that the connection between sentiment and action may not hold this time. But again it is too soon to know.
Our forecast:
a below average
secular rate of recovery resulting from too much government spending, too much
government debt to service, too much government regulation, a financial system
with an impaired balance sheet. and a business community unwilling to hire and
invest because the aforementioned along with...... the historic inability of
the Fed to properly time the reversal of a vastly over expansive monetary policy.
The pluses:
(1)
our improving energy picture. The US
Notable of late
is the decline in oil prices; more notable is the reason---increased
supply. Who amongst us ten years ago
would have thought that the US was headed for energy independence and energy
prices would be declining due to more supply rather than less demand
[recession]. The geopolitical
implications aside, the principal economic effects are [a] a declining cost of
production and [b] an improvement in real disposable income.
(2) the sequester. as you know, the major argument of opponents
of the sequester is that it would severely impact economic activity. Exhibit one and two of the counter argument are
the third quarter GDP and October nonfarm
payroll reports---both coming in well ahead of expectations. Hopefully, they will give support and
confidence to the GOP negotiators in the upcoming budget discussions.
That said I
remind you that the CBO estimates that the budget deficit starts expanding
again in the 2015 fiscal year; much of it a result of Obamacare. So the sequester is not a long term solution
to profligate spending.
The
negatives:
(1) a
vulnerable global banking system. It was
a slow week for revelations/prosecutions of bankster misdeeds---which is not to
say that they still haven’t been busy little beavers defrauding you and me:
[a] EU to fine
Deutschebank, JP Morgan and HSBC for interest rate rigging:
[b] manipulation
in everything (medium):
[c] Goldman is
now under investigation (short):
‘My concern here.....that: [a] investors ultimately
lose confidence in our financial institutions and refuse to invest in America and
[b] the recent scandals are simply signs that our banks are not as sound and
well managed as we have been led to believe and, hence, are highly vulnerable
to future shocks, particularly a collapse of the EU financial system.’
(2) fiscal policy. the budget
debate will begin again shortly. My
concern on this point is [a] the GOP will give up the sequester in the process;
though as I noted above the newly released GDP
and nonfarm payroll numbers should give them the confidence to hold the line,
[b] the DC antics have done sufficient damage to business and consumer
confidence to have a material impact on the economy---this notion supported by
the latest consumer sentiment report. We
won’t have any evidence of an economic impact until the November/December stats
are released, though the aforementioned data could be a precursor.
The other
potential negative is the fiscal consequences of the implementation of
Obamacare. Everyday we get more evidence
that its execution and costs dwarf anything that we have ever seen in a
government program. Based on the
overwhelming weight of opinion from the experts, it seems the odds are stacked
against any improvement over the short term.
As a result, I can’t believe that Obama won’t delay the individual
mandate; but you never know with how an ideologue will act when the signature
legislation of His term is being challenged.
Even if He does nothing, I believe that eventually Obamacare will
implode on its own. The question is how
much damage it does in the process.
(3)
the potential negative impact of central bank money
printing: The key point here is that [a] the Fed has inflated bank reserves
far beyond any comparable level in history and [b] while this hasn’t been an
economic problem to date, {i} it still has to withdraw all those reserves from
the system without creating any disruptions---a task that I regularly point out
it has proven inept at in the past and {ii} it has created or is creating asset
bubbles in the stock market as well as in the auto, student and mortgage loan
markets.
The news this
week is:
[a] the move by
the ECB toward easier money. The good
news is that it has been austere enough to date that, by itself, this action
will probably help the EU economy in its recovery without being
inflationary. That said, it is not clear
yet just how easy the ECB will be. The
issue in my mind is less its impact of EU growth and more how it would
contribute to the current global surge in liquidity.
[b] the much
better than expected GDP and nonfarm
payrolls stats. I mentioned last week
the statement from the last FOMC meeting that was more upbeat than
expected. The question is, did the Fed
know these datapoints would be this improved or was it new news to them?. In other words, how will it impact Fed policy?
The other
question is, how will it affect investor perception of the need for tighter
monetary policy and their willingness to leave the timing of the transition in
the hands of the Fed? With all the conflicting forces now in play
{easier ECB, potential tightening by the Chinese central bank, better US data},
it will likely take some time before all this information is absorbed and
processed. So I don’t anticipate an
immediate reaction.
The central
point of all of this is not when but how the transition process to tighter monetary policy occurs. My bet is that history repeats itself and the
Fed bungles the process, most likely by not tightening fast enough.
And:
And:
And:
And this on the Bank of Japan (medium):
(4)
a blow up in the Middle East . Friday morning, the news wires were carrying
reports that a group of world powers were close to an agreement with Iran
on halting the advance elements of its nuclear program. At face value, this is very good news. The proof of the pudding, however, lies in
how it is implemented and verified---for which there are no details.
Nevertheless,
if this is something more than a face saving way out of very difficult
situation, it would certainly turn the heat down in this part of the
world. I await the details.
(5)
finally, the sovereign and bank debt crisis in Europe . The economic news out of Europe
remained mixed this week. The big news
though was the drop in interest rates by the ECB. As I noted above, this move should initially
have a positive impact on EU economic growth.
So our ‘muddle through’ scenario remains in tact. There is, however, some uncertainties as to
how long and how much easing occurs; and by extension, how it impacts the
ultimate transition to tightening by the global central banks.
Bottom line: the US
economy continues to improve albeit sluggishly.
That notion was given a big boost this week via the GDP
and nonfarm payroll blow out numbers, As
you know, I have been worried about the potential impact on business and
consumer confidence of the last as well as the upcoming budget battle. If this data is a sign of things to come,
then that concern can be put to rest.
The numbers out
of Europe were mixed this week but the big news was the
drop in interest rates by the ECB. The
even better news is that the ECB has been tight enough that an easing in policy
will likely be stimulative to the EU economy---which improves the odds of our
‘muddle through’ scenario.
Monetary policy,
more specifically QEInfinity, remains the major risk to our forecast for
several reasons: (1) it fosters lousy fiscal policy, (2) the longer it goes on,
the greater the risk that the transition from easy to tight money will cause
severe dislocations and (3) the Fed may be in a position where it could lose
control of the transition process [assuming it even has a plan and that the
plan could actually work] to multiple sources---China, Japan, the Markets
themselves to name a few. The question
is, will this week’s economic data influence its intent to taper? My guess is that the Markets’ May/June
reaction to Bernanke’s taper will keep the Fed easier, longer than many think.
This week’s
data:
(1)
housing: weekly mortgage and purchase applications fell---a
lot,
(2)
consumer: weekly retail sales were mixed; weekly
jobless claims fell more than expected; October nonfarm payrolls soared;
September personal income was up more than anticipated while spending was in
line; initial November consumer sentiment was disappointing,
(3)
industry: October factory orders were very
disappointing; the October ISM nonmanufacturing index improved,
(4)
macroeconomic: revised third quarter GDP
was much stronger than anticipated as was the price deflator.
The Market-Disciplined Investing
Technical
The indices (DJIA
15761, S&P 1770) continue to trend higher.
Thursday’s good news is bad news pin action morphed into good news is
good news on Friday. While a bit
confusing, at least for me, a bid clearly remains under the Market. So it appears that the bulls are still in
control and any worries about Thursday’s ‘outside’ sell day may have been
premature.
Both of the
Averages are well within uptrends along all timeframes: short term
(15227-20227, 1708-1862), intermediate term (15227-20227, 1622-2204) and long
term (5015-17000, 728-1850).
Volume on Friday
was flat; breadth improved. The VIX was up, closing within its short term
trading range and intermediate term downtrend.
The long Treasury
was down big on huge volume. It
penetrated the lower boundary of its very short term uptrend and is potentially
negating the developing reverse head and shoulders. The move is not good technically speaking;
and if confirmed would portend higher yields.
That said, it did close within its short term trading range and
intermediate term downtrend.
While stocks
apparently aren’t concerned about rising rates, I am. As I have noted several
times if the bond markets start to take control of the long end of the yield
curve, it will put pressure on the Fed to raise short term rates. And if short rates start rising, it will
change the current valuation dynamics of securities markets---which would not
be good for stocks.
GLD also got hit
hard. It closed right on the lower
boundary of a very short term uptrend---which if broken would suggest further
downside in GLD prices. It remained
within its short term and intermediate term downtrends.
Bottom line: all trends of both indices are up, though as I
have documented in our Morning Calls, the number of divergences within the
Market internals are proliferating. And that is worrisome. On the other hand, Friday’s pin action was a
pretty clear message that the bulls aren’t going down without a fight.
So there remain
decent odds that there is more upside.
I continue to
believe that the upper boundaries of both of the Averages (17000/1850) long
term uptrends are the most likely price objectives. If the downside is simply Fair Value
(11575/1436), the risk reward from current levels is not all the attractive. Plus the increasing divergences increase the
risk of not achieving the full upside.
A trader still
might want to play for another leg up but I would do so only if tight stops are
used. As a longer term investor, I think
that the aforementioned risk/reward ratio is an invitation to lose money. I would, however, take advantage of the
current high prices to sell any stock that has been a disappointment and to
trim the holding of any stock that has doubled or more in price.
In the meantime,
if one of our stocks trades into its Sell
Half Range
Fundamental-A Dividend Growth Investment Strategy
The DJIA (15761)
finished this week about 36.1% above Fair Value (11575) while the S&P (1770)
closed 23.2% overvalued (1436). Incorporated
in that ‘Fair Value’ judgment is some sort of half assed attempt at getting fiscal
policy under control, a botched Fed transition from easy to tight money, a
historically low long term secular growth rate of the economy and a ‘muddle
through’ scenario in Europe.
The economy
continues to track our forecast; and we got some strong support for that from
the aforementioned GDP and nonfarm payroll
numbers. Unfortunately, we did get a
negative consumer sentiment report from the University of Michigan survey which
speaks to my concern that the fiscal mess in DC will impact business and
consumer sentiment which will in turn lead to slower economic growth. That hasn’t shown up in the data yet and may
not ever. But until we know, it is on my
list of worries.
EU bank solvency
remains an issue. I continue to worry
about what we don’t know, i.e. we still
don’t know how much ‘junk’ remains on bank balance sheets. That said, an improving economy lessens the
risk of sovereign and bank insolvencies.
The general
euphoria prevailing among investors regarding the likely continuation of
QEInfinity looked a bit schizophrenic this week. Thursday, the upbeat GDP
report was released and stocks took it in the snoot. But then Friday, the
stronger than expected nonfarm payroll number pushed stocks back to near new
highs. Schizophrenic behavior generally
reflects schizophrenic emotions; meaning, I think, that, collectively, investor
uncertainty about stock valuation and direction is rising---a notion which all
the technical divergences that I enumerate support.
My point here is
and has been that QE has to end, what prompts the end is not necessarily in the
hands of the Fed (and indeed, I think
that the Fed will delay action long enough that the Markets will force the
issue), but when it does, the Market
impact is likely to be ugly and the longer it goes on, the uglier the impact.
Bottom line: the
assumptions in our Economic and Valuation Models haven’t changed. Indeed, they got support from some strong
major economic indicators, an easier ECB and the potential for some kind of
détente in the Middle East .
That said, I
remain confident in the Fair Values generated by our Valuation Model---meaning
that stocks are overvalued. So our
Portfolios maintain their above average cash position. Any move to higher levels would encourage
more trimming of their equity positions.
This week, our Portfolios did nothing.
DJIA S&P
Current 2013 Year End Fair Value*
11600 1440
Fair Value as of 11/30/13 11575 1436
Close this
week 15761 1770
Over Valuation vs. 10/31 Close
5% overvalued 12153 1507
10%
overvalued 12732 1579
15%
overvalued 13311
1651
20%
overvalued 13890 1723
25%
overvalued 14468 1795
30%
overvalued 15047 1866
35%
overvalued 15626 1938
Under Valuation vs.10/31 Close
5%
undervalued 10996 1364
10%undervalued 10417 1292
15%undervalued 9838 1220
* Just a reminder that the Year
End Fair Value number is based on the long term secular growth of the earning
power of productive capacity of the US
economy not the near term cyclical
influences. The model is now accounting
for somewhat below average secular growth for the next 3 to 5 years with
somewhat higher inflation.
The Portfolios and Buy Lists are
up to date.
Steve Cook received his education
in investments from Harvard, where he earned an MBA, New York University, where
he did post graduate work in economics and financial analysis and the CFA
Institute, where he earned the Chartered Financial Analysts designation in
1973. His 40 years of investment
experience includes institutional portfolio management at Scudder. Stevens and
Clark and Bear Stearns, managing a risk
arbitrage hedge fund and an investment banking boutique specializing in funding
second stage private companies. Through
his involvement with Strategic Stock Investments, Steve hopes that his
experience can help other investors build their wealth while avoiding tough
lessons that he learned the hard way.
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